Enron, the story that broke too late

HOWARD KURTZ

Bethany McLean, 31, a Fortune magazine reporter with an impossibly soft voice, decided to take a hard look at Enron last January. The Houston energy company didn’t like her questions. The CEO, Jeffrey Skilling, called her unethical and hung up on her. The chairman, Kenneth Lay, called Fortune’s managing editor to complain. The chief financial officer, Andrew Fastow, flew to New York to tell McLean and her editors that Enron was in great shape.

McLean refused to be intimidated. ‘‘The company remains largely impenetrable to outsiders,’’ she wrote in Fortune’s March 5, 2001, issue. ‘‘How exactly does Enron make its money? Details are hard to come by because Enron keeps many of the specifics confidential. ... Analysts don’t seem to have a clue.’’ The story sank without a trace.

‘‘At that point the coverage of Enron was pretty glowing,’’ McLean says. The stock had soared 90% the previous year and was selling for $76 a share. Now that the company has collapsed amid charges of financial chicanery, devastating its employees’ retirement funds, Enron is the hottest story in the country. Political reporters joined the fray after learning that Enron had sought help from the Bush White House. Teams of business journalists are digging into the largest corporate meltdown in American history. But, as in the savings and loan debacle a dozen years ago, it took news organisations too long to piece together the clues.

‘‘It’s fair to say the press did not do a great job in covering Enron,’’ says Steve Shepard, editor in chief of Business Week magazine, which ran briefs on the company’s financial problems until a cover story in November. ‘‘Enron was really a systemic failure of all the checks and balances we have on corporate governance: integrity of management, board of directors, audit committee of the board, outside accounting firm, Wall Street analysts and ultimately the press. And all of us failed.’’

Last May, the Wall Street Journal ran a front-page story on Lay getting a half-hour meeting to lobby Vice President Cheney on the administration’s energy programme. The story noted that over the years Enron had donated nearly $2 million to Bush, Lay’s longtime friend. ‘‘I feel pretty good about what we’ve done on Enron,’’ says Alan Murray, Washington bureau chief. ‘‘What we did not understand was that it was heading for a disaster.’’

The problem, he says, is that such stories often turn on ‘‘arcane and technical’’ practices. ‘‘The press doesn’t pay as much attention to some of these regulatory issues that have more impact on the world than the political issues we do pay attention to,’’ Murray says.

A dramatic decline in stock isn’t necessarily a warning of foul play, adds Larry Kramer, chief executive of CBS MarketWatch.com, noting that his own company went public at $97 a share and the stock is now worth $4. ‘‘People just got dazzled by the size of the business,’’ he says of Enron.

Most Wall Street analysts had a buy rating on Enron stock. Indeed, only one group wanted Enron’s stock to tank: the short-sellers, professional traders who bet on a stock’s decline. One short-seller, Jim Chanos of ynikos Associates, suggested to Fortune’s McLean that she look at Enron’s Form 10-K, a required annual filing with the Securities and Exchange Commission. McLean says she was struck by the document. There were ‘‘strange transactions,’’ ‘‘erratic cash flow’’ and huge debt. ‘‘It made you wonder, if their business was so phenomenally profitable, why they had to be adding debt at such a rapid rate,’’ she says. But the story was hard to write: ‘‘You can’t just spout off about derivatives and expect people to get it.’’

Ironically, Fortune’s own surveys had named Enron America’s most innovative firm for six straight years, and much of the coverage was similarly upbeat. Last January, a Houston Chronicle story was headlined: ‘‘Houston has $100 billion company; Enron Corp. sets records for sales, earnings in 2000.’’ There were a few critical pieces, but they mainly focused on politics.

Now that Enron’s stock has been booted off the New York Stock Exchange, Fortune staffers can’t say enough about the way McLean defied both Enron and conventional wisdom. ‘‘It was a gutsy thing to do,’’ Kirkland says. ‘‘When you look back it’s obvious: Why weren’t we all asking these questions?’’

(LA Times-Washington Post)